crack-spreads-and-refining-margins — commodities and energy markets

Refiners don't care about the absolute price of oil. They care about the difference between what they pay for crude and what they receive for gasoline, diesel, and other products. This difference—the crack spread—determines whether a refinery makes money or loses it. The point is: understanding crack spreads helps you analyze refining stocks, interpret energy market signals, and recognize when product markets are tight or loose.

What Crack Spreads Measure

A crack spread represents the gross refining margin: the revenue from selling refined products minus the cost of crude oil input. The term "crack" refers to the chemical process of "cracking" long hydrocarbon chains in crude oil into shorter, more valuable molecules (gasoline, diesel, jet fuel).

The basic concept:

Buy crude oil at market price
Process it through a refinery (incurs operating costs)
Sell refined products at market prices
The spread between product revenue and crude cost is the crack spread

Why it matters: Crack spreads determine refinery profitability. When spreads are high ($25+ per barrel), refiners earn strong margins and operate at maximum capacity. When spreads are low (below $10 per barrel), refiners may cut throughput or defer maintenance.

The 3-2-1 Crack Spread

The most commonly quoted crack spread is the 3-2-1, which approximates the typical output of a US refinery.

The ratio: 3 barrels of crude oil → 2 barrels of gasoline + 1 barrel of distillate (diesel/heating oil)

The formula:

3-2-1 Crack Spread = (2 x Gasoline Price + 1 x Distillate Price) - (3 x Crude Oil Price)

Then divide by 3 to express on a per-barrel-of-crude basis:

Per-barrel 3-2-1 = [(2 x Gasoline) + (1 x Distillate) - (3 x Crude)] / 3

Why these products? US refineries typically produce approximately 45-50% gasoline and 25-30% distillates from each barrel of crude, with the remainder being jet fuel, residual fuel, petrochemical feedstocks, and other products. The 3-2-1 simplifies this to a tradeable ratio.

Worked Example: Calculating the 3-2-1

Current market prices (illustrative):

WTI crude oil: $78.00 per barrel
RBOB gasoline: $2.45 per gallon (futures price)
ULSD heating oil: $2.65 per gallon (ultra-low sulfur diesel futures)

Step 1: Convert product prices to per-barrel terms

Products trade in gallons; crude trades in barrels. There are 42 gallons per barrel.

Gasoline per barrel: $2.45 x 42 = $102.90 per barrel
Distillate per barrel: $2.65 x 42 = $111.30 per barrel

Step 2: Calculate product revenue

For the 3-2-1 ratio (per 3 barrels of crude input):

Gasoline revenue: 2 x $102.90 = $205.80
Distillate revenue: 1 x $111.30 = $111.30
Total product revenue: $317.10

Step 3: Calculate crude cost

Crude cost: 3 x $78.00 = $234.00

Step 4: Calculate the spread

Gross spread: $317.10 - $234.00 = $83.10 (for 3 barrels)
Per-barrel spread: $83.10 / 3 = $27.70 per barrel

Interpretation: At a $27.70 crack spread, refiners earn approximately $27.70 per barrel of crude processed before operating costs. This is a strong margin (typical range is $15-25).

Other Common Crack Spread Formulas

5-3-2 Crack Spread

5 barrels crude → 3 barrels gasoline + 2 barrels distillate
More commonly used for Gulf Coast refineries with higher distillate output

2-1-1 Crack Spread

2 barrels crude → 1 barrel gasoline + 1 barrel distillate
Simpler calculation, similar directional signal

Gasoline Crack (1-1)

1 barrel crude → 1 barrel gasoline
Isolates gasoline margin specifically

Heating Oil Crack (1-1)

1 barrel crude → 1 barrel heating oil/diesel
Isolates distillate margin specifically

Regional variations:

Gulf Coast 3-2-1: Uses WTI crude and Gulf Coast product prices
Atlantic Coast 3-2-1: Uses Brent crude and New York Harbor product prices
Singapore 3-2-1: Uses Dubai crude and Singapore product prices

What Drives Crack Spread Volatility

Crack spreads can swing dramatically. In 2022, Gulf Coast 3-2-1 spreads exceeded $50 per barrel at times—more than double normal levels. Several factors drive this volatility:

1. Seasonal demand patterns

Summer driving season (May-September): Gasoline demand peaks, gasoline cracks strengthen
Winter heating season (November-March): Distillate demand peaks (heating oil), distillate cracks strengthen
Shoulder seasons (spring/fall): Softer demand, typically lower spreads

2. Refinery outages

Unplanned outages (fires, equipment failures, weather damage) reduce product supply while crude supply remains constant. Product prices spike relative to crude, widening crack spreads.

Hurricane-related shutdowns on the Gulf Coast regularly spike gasoline cracks by $5-10 per barrel within days
Major outages at large refineries (500,000+ barrel/day capacity) can move national spreads

3. Crude quality differentials

Not all crude is equal. Light, sweet crude (low sulfur) produces more valuable products with less processing. Heavy, sour crude requires more complex refining.

When light crude is abundant, simple refineries profit (they can process cheap light crude)
When light crude is scarce, complex refineries profit (they can process discounted heavy crude)

4. Turnaround schedules

Refineries require periodic shutdowns for maintenance (turnarounds). These are typically scheduled in spring and fall when demand is lower. Heavy turnaround seasons reduce industry capacity and support product prices.

5. Export demand

US refineries export significant volumes of gasoline and diesel to Latin America, Europe, and other regions. Strong export demand tightens domestic product markets and supports crack spreads.

Typical Crack Spread Ranges

Spread Level	Interpretation
Below $10/barrel	Weak margins; refiners may cut throughput
$10-15/barrel	Below-average margins; covers operating costs marginally
$15-25/barrel	Normal range; healthy profitability for most refiners
$25-35/barrel	Strong margins; refiners maximize throughput
Above $35/barrel	Exceptional margins; indicates supply stress or disruption

2022 example: Following Russia's invasion of Ukraine and the subsequent disruption to European diesel supply, Gulf Coast crack spreads reached $45-60 per barrel during parts of 2022. This was highly unusual and reflected genuine product scarcity.

2020 example: During COVID-19 demand destruction, crack spreads collapsed to $5-10 per barrel as product inventories built and refiners cut runs.

From Crack Spread to Net Margin

The crack spread is a gross margin. Refiners still incur significant operating costs:

Typical operating costs:

Energy (natural gas for heat and power): $2-4 per barrel
Labor and maintenance: $1-2 per barrel
Depreciation: $1-2 per barrel
Other (catalysts, chemicals, overhead): $1-2 per barrel

Total operating costs: Approximately $5-10 per barrel for a well-run refinery

Net refining margin = Crack Spread - Operating Costs

Example:

Crack spread: $22.00 per barrel
Operating costs: $7.00 per barrel
Net margin: $15.00 per barrel

At 100,000 barrels per day throughput, this translates to $1.5 million per day in gross profit, or approximately $550 million annually (assuming consistent margins, which never happens).

Why Investors Watch Crack Spreads

For refining stocks: Crack spreads are the single most important driver of refiner profitability. When spreads are high, stocks like Valero, Marathon Petroleum, and Phillips 66 typically outperform. When spreads collapse, these stocks underperform.

For integrated oil companies: ExxonMobil and Chevron have refining operations, but they also produce crude. High crack spreads help their downstream earnings even if crude prices are soft. Low crack spreads hurt downstream even if upstream is strong.

For macro signals: Strong crack spreads often indicate:

Tight product supply (potential inflation pressure from fuel costs)
Healthy demand (positive economic signal)
Infrastructure constraints (capacity investment opportunity)

Weak crack spreads often indicate:

Excess product supply (deflationary pressure)
Soft demand (potential economic slowdown)
Overcapacity (negative for refining investment)

Monitoring Checklist

Track crack spreads using these resources:

CME Group: Publishes 3-2-1 crack spread data for Gulf Coast (WTI-based)
Bloomberg/Reuters: Real-time crack spread calculations
EIA: Weekly refiner margins in the Petroleum Status Report

Key metrics to monitor:

Gulf Coast 3-2-1 crack spread (weekly average)
Gasoline vs. distillate crack components (seasonal shifts)
Refinery utilization rate (EIA weekly data)
Planned vs. unplanned outage news

Interpretation guidelines:

Spreads above $25: Look for refiner stocks to outperform
Spreads below $15: Caution on refiner stocks; watch for throughput cuts
Gasoline crack spiking ahead of driving season: Seasonal norm
Distillate crack spiking in winter: Heating demand or export pull

Key Takeaways

Crack spreads measure refining profitability: The difference between product revenue and crude cost determines whether refineries make money.
The 3-2-1 formula: (2 x Gasoline + 1 x Distillate - 3 x Crude) / 3 gives the per-barrel gross margin. This is the most commonly quoted spread.
Typical range: $15-25 per barrel. Below $10 is weak; above $35 is exceptional. The range shifted higher post-2020 due to capacity closures and tighter supply.
Drivers of volatility: Seasonal demand, refinery outages, turnaround schedules, crude quality differentials, and export demand all affect spreads.
Worked example: At $78 WTI, $2.45 gasoline, and $2.65 distillate, the 3-2-1 crack spread is approximately $27.70 per barrel—a strong margin indicating healthy refining economics.
Net margins subtract operating costs: Expect $5-10 per barrel in operating costs before calculating true profitability.

Related: Energy Supply Chain from Wellhead to Pump | Inventory Reports (EIA, API) and Price Impact | Oil Market Structure: Brent vs. WTI

Crack Spreads and Refining Margins